FEBRUARY 6, 2006 -- President Bush proposed an austere budget Monday that challenges Congress to cut Medicare and domestic discretionary programs in an election year while boosting funding for defense, homeland security, and the wars in Iraq and Afghanistan.

The $2.77 trillion fiscal 2007 budget proposal would cut non-defense discretionary spending for the second straight year, with more than a dozen departments and agencies targeted for reductions, including education, health, housing, transportation, and agriculture programs.

Bush proposed saving about $15 billion in fiscal 2007 by eliminating or significantly reducing 141 discretionary programs, and $65 billion over five years by trimming the growth of entitlement programs, including $36 billion from Medicare.

At the same time, Bush again urged Congress to make his 2001 and 2003 tax cuts permanent, and he proposed a number of new tax breaks for individuals who set aside money in health savings accounts or purchase their own health insurance policies.

The health care–related tax credits would cost $51.7 billion over five years and $136.5 billion over 10 years. Other tax cuts would extend research and development credits and bolster charitable giving.

The tax cut plans combined would cost $280 billion over five years and $1.67 trillion over 10 years, far more than the budget cuts.

"To stay on track to meet my goal of cutting the deficit in half by 2009, we must maintain our pro-growth policies and insist on spending restraint," Bush said in his budget message.

Bush will face a difficult road in persuading lawmakers to approve another round of reductions in popular entitlement programs like Medicare.

The House only last week barely cleared a smaller $39 billion savings package (S 1932), the first since 1997 to slice Medicare, Medicaid, student loans, and other entitlement programs, after GOP leaders negotiated for months with skittish moderates.

Lingering DeficitDespite all the proposed spending cuts, the fiscal 2007 deficit would remain near record levels in dollar terms, at $354 billion, or 2.6 percent of gross domestic product.

The administration predicted that fiscal 2006 would end with a $423 billion deficit, a record in dollar terms, largely because of hurricane and war spending, but the deficit would drop to $208 billion by fiscal 2009, or 1.4 percent of GDP. That prediction is in line with Bush's pledge to cut the federal budget deficit in half by 2009, as measured against the initial fiscal 2004 deficit projection of $521 billion, while maintaining his tax cuts.

However, the long-term reduction in the deficit assumes that war spending ends, that a tax "patch" to freeze the impact of the alternative minimum tax is not extended, and that Congress adopts a number of new user fees and other proposals it has rejected in the past.

Overall non-security discretionary spending would drop from $400.4 billion to $398.3 billion, while the defense budget would rise 7 percent to $439.3 billion. That does not include a $50 billion request for fiscal 2007 war spending. Homeland security spending would rise 3 percent to $33.1 billion.

Bush also will ask Congress for an additional $70 billion for supplemental war spending in fiscal 2006 on top of the $50 billion already appropriated. That $70 billion request would bring the total spent on the wars since the Sept. 11, 2001, terrorist attacks to about $393 billion.

All of the supplemental funding requested by Bush would be treated as emergency funds, not subject to annual congressional caps on discretionary spending. But the money would add to the deficit.

The new budget anticipates that the cost of the Medicare prescription drug benefit will drop by $10 billion from earlier projections in 2006, and by $130 billion over the next 10 years.

House Budget Chairman Jim Nussle, R-Iowa, and Senate Budget Chairman Judd Gregg, R-N.H., have both endorsed additional cuts to entitlement programs this year, but not all of their Republican colleagues have been as enthusiastic, particularly in an election year.

"I think it's a good budget because it challenges the Congress to be fiscally disciplined and we need to do that," Gregg said, contending that it is possible for Congress to pass another savings package.

"I don't see why we can't. I think most people expect Republicans to stand up and be fiscally disciplined."

"It represents the same reckless fiscal course the Bush administration has followed for the last five years," said Sen. Kent Conrad of North Dakota, the ranking Democrat on the Budget Committee. "It explodes deficits, but then conceals them by providing only five years of numbers and leaving out large costs, like long-term Alternative Minimum Tax (AMT) reform and realistic ongoing war costs."

Mission

The mission of The Commonwealth Fund is to promote a high-performing health care system that achieves better access, improved quality, and greater efficiency, particularly for society's most vulnerable, including low-income people, the uninsured, minority Americans, young children, and elderly adults.